Regulators and bankers resumed a third day of talks today in a desperate attempt to reach a deal to sell Lehman Brothers and prevent the struggling investment bank from flooding jittery financial markets
with toxic assets at fire sale prices.
Britain's Barclays, which had appeared to be the frontrunner to take over Lehman - excluding its bad mortgage-related assets - pulled out of the bidding this afternoon, according to a source close to the matter.
Among those spotted arriving in black limousines at the fortress-like headquarters of the New York Federal Reserve in downtown Manhattan today were Citigroup CEO Vikram Pandit and Steve Black, who is co-CEO of JPMorgan Chase & Co's investment bank.
The outcome could include a hiving-off of the bad assets that have crippled the 158-year-old Lehman into a "bad bank", in which rivals would take stakes. But if a deal can't be struck, bankruptcy is possible.
Either outcome would tarnish the reputation of Lehman CEO Dick Fuld, who has been adamant that the bank can survive as an independent entity and is blamed by some for being too slow to realise the depth of the crisis faced by the firm.
"Anyone else who has these toxic assets, if they haven't made a full confession, they better do it now," said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati, Ohio, which has $2.9 billion of assets under management. "These assets may be hard to unwind, but they can unwind your firm. Lehman tried to deny reality until the bitter end."
Underscoring the fragility of other major financial firms, shares of brokerage Merrill Lynch tumbled 12 per cent on Friday, while those of insurer American International Group fell more than 30 per cent.
Shares of Washington Mutual, the largest US savings and loan, have declined 80 per cent this year.
All three companies have varying degrees of exposure to the mortgages and other toxic assets that were Lehman's undoing.
The crisis at Lehman presents a delicate balancing act for the Federal Reserve, who have urged Wall Street chiefs to come up with their own solution. So far this year, the US government has sponsored rescues of Lehman rival Bear Stearns and mortgage lenders Freddie Mac and Fannie Mae.
The authorities don't want to be accused of encouraging excessive risk-taking by bailing out another yet another investment bank. But they also cannot afford to let the Lehman crisis paralyse the financial system and deepen the credit crisis.
Investors have said that if nothing is done by tomorrow, global financial markets could plunge.